Beam046 The Portfolio Management Services Assessment Answers
Verizon (VZ), General Electric (GE), Walt Disney (DIS) and Microsoft (MSFT). Construct an optimal active portfolio of these five stocks using information that was available to you one year ago.
the market value weighted portfolio of the five stocks. (Note that the relative performance of the active portfolio will not affect your mark for the assignment).
You are a risk analyst for an investment bank and have been tasked with analyzing the risk of an investment in options on Procter and Gamble (PG) stock. Compute the VaR at a confidence level of 75% for a position in a call option on PG stock with a maturity that is as close as possible to three months, and for a strike price that is about 90% of the current stock price. The VaR horizon is the maturity of the option. You should also estimate the corresponding VaR for a position in the underlying stock. You should incorporate the expected return of the stock, and any dividends that it pays, in the simulation.
Answer:
The portfolio management services deals with the management of the various asset class and the distribution and allocation of the same according to the risk and return preference of the investors. Investor risk and return preference are some of the primary concern, which needs to be dealt while evaluating the objectives and goals of the portfolio. The risk and return of the objective should correlate with the investible asset class and the weights given to each of the asset class. The portfolio management theory helps in guiding the investors about the financial goals and objectives (Zhou, 2018).
3.2 Research Instruments
The various research instruments that needs to be taken while analyzing the portfolio and deciding among the asset class is the performance of the same in the historical trend period and the prospect of the same. The inclusion of historical data for evaluation of certain financial risk measurement analysis such as correlation of the asset class (Stocks or Bonds with the Benchmark), Volatility of the Asset class and the return provided by the asset class.
3.2.1 Principles of Passive Portfolio Management
The key factor involved in the passive management of the portfolio deals with passively investing in the asset class and not changing the asset class with the changing business conditions and the market conditions. The passive portfolio management is sometimes also referred as investment in the benchmark as the weights and the asset class remains the same. The evaluation of the risk and return in such kind of portfolio management is poor as the changing market and the macro economic conditions are not incorporated (HA Davis & Lleo 2015).
3.2.2 Black Letterman Model
The mathematical model deals with the application of the portfolio allocation in order to reduce the concentration of portfolio and bring various asset class according to the industry it belongs and the nature of the company. The model deals with the modern concept of portfolio management, which deals with eliminating concentration risk and brings out a balance between cyclical and defensive stocks according to the risk and return preference of the investors.
3.2.3 Sensitivity Analysis Method
The sensitivity analysis is determining the key factor, which can change the risk, return of the portfolio, and affect the performance of the portfolio in the long term. The key factors analyzed while constructing the portfolio was the risk free rate of return, interest rate in the economy, volatility in the asset class. The changes in the risk free rate of return and the interest rate in the economy can affect the required rate of return from the portfolio and the valuation of the asset class. The increase in the volatility of the volatility of the asset class can also change the risk and return profile of the portfolio.
3.2.4 Dividend Discount Model
The dividend discount model is the common form of valuation used by the portfolio fund manager to determine the actual value of the shares or the bonds in order to determine the feasibility of the investment. The dividend discount model takes into account the growth rate of the company or the asset class and the return provided by the asset class in the form of dividends. The terminal growth rate is the key factor involved in the valuation of the asset class and determining the future prospect of the company (Lazzati & Menichini, 2015).
3.3 Data Analysis
The data analysis for the portfolio management was evaluated by determining the performance of the stock and by forecasting the financials of the company. The construction of the optimum active portfolio was evaluated and carried on by the help of determining the various stock return and creating the risk return matric for the portfolio. The Risk free rate of return was considered choosing the US 10 Year Treasury bill and the applicable rate of the same was taken in the evaluation of the required return. The market value for each of the company was determined by using the market price of the stocks and the outstanding shares in respect to the same. The benchmark taken for the portfolio was the S&P 500 Index and the return of the same will be analyzed for the comparison of the return evaluation of the portfolio (Bonstrom & Corotis, 2015).
3.4 Limitation of Research
The key limitation of the research was the use of the historical data incorporated in the analysis and the evaluation of the asset class as the past performance could not possibly reflect the future performance of the asset class. There should be application of certain risk management strategies and tools so that the volatility of the asset class could be well assessed.
Reference
Bonstrom, H., & Corotis, R. B. (2015). Building portfolio seismic loss assessment using the first-order reliability method. Structural Safety, 52, 113-120.
HA Davis, M., & Lleo, S. (2015). Risk-Sensitive Investment Management.
Lazzati, N., & Menichini, A. A. (2015). A dynamic approach to the dividend discount model. Review of Pacific Basin Financial Markets and Policies, 18(03), 1550018.
Zhou, T. (2018). A Method for Portfolio Selection Based on Joint Probability of Co-Movement of Multi-Assets. Journal of Mathematical Finance, 8(03), 535.
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